US CPI in November Matches Expectations, But Seasonal Adjustment Factors Cloud the Picture

The US Consumer Price Index (CPI) for November 2024 delivered results largely in line with expectations, reinforcing the likelihood of a quarter-point rate cut from the Federal Reserve at its meeting next week. Both headline and core CPI inflation posted a 0.3% month-over-month (m/m) seasonally adjusted (SA) increase, matching the median consensus and Scotia’s forecast. However, deeper analysis reveals that distortions in seasonal adjustment (SA) factors may have played a significant role, possibly overstating the core CPI figure.

Headline and Core Inflation Hold Steady

For the fourth consecutive month, core CPI inflation recorded a 0.3% m/m increase, suggesting a consistent trend. This performance aligns with forecasts from major institutions and reflects moderate price pressures in key areas. However, analysts caution that the consistency in inflation figures may mask significant underlying distortions stemming from pandemic-era SA factors.

The Role of Seasonal Adjustment Factors

Seasonal adjustment factors are critical for interpreting CPI data as they smooth out predictable seasonal variations. Yet, since the pandemic, these factors have introduced significant biases. November’s core CPI could have been reported closer to 0–0.2% m/m without these distortions, highlighting the potential overstatement of inflation in recent months.

Notably:

• The five largest distortions in core CPI SA factors have occurred during the pandemic era.
• Pre-pandemic SA factors suggest November’s inflation would have been significantly lower, raising questions about the reliability of current methodologies.

Federal Reserve Chair Jerome Powell has previously emphasized the need to smooth inflation figures over time to account for such anomalies. However, the mixed signals from SA factors throughout the year have complicated the Fed’s policy direction, making it difficult to consistently interpret inflationary trends.

Shelter Inflation: Signs of Cooling

Shelter costs, a major driver of inflation in recent months, showed signs of moderation:

• Shelter inflation rose 0.3% m/m SA, but primary rent and owners’ equivalent rent both increased by only 0.2%.
  This suggests that the long-anticipated disinflation in housing, driven by declining market rents, may finally be materializing. However, it is too early to determine whether this trend will persist.

Core Services Inflation Remains Sticky

Despite improvement in shelter costs, core services inflation excluding housing and energy remains a concern:

• Core service prices rose 4.2% m/m SAAR (seasonally adjusted annualized rate), maintaining their stickiness at elevated levels.
  This persistence could offset gains from housing disinflation and poses a challenge to the Fed’s broader inflation objectives.

Other Inflation Drivers

Several components of CPI showed mixed trends:

• Gas prices: Up 0.6% m/m SA, reflecting volatile energy markets.
• Core goods prices: Increased by 0.3%, maintaining moderate upward pressure.
• Food prices:
  • Food away from home rose 0.3%, indicating persistent inflation in the service sector.
  • Groceries (food at home) saw a hotter 0.4% rise, outpacing overall inflation.
• Clothing prices: Increased modestly by 0.2%, remaining unspectacular.

Implications for the Fed

The November CPI data supports the case for a quarter-point rate cut from the Federal Reserve at its upcoming meeting. However, the distortions in SA factors complicate the inflation narrative, making it difficult to assess the true pace of price growth. Powell and the Fed must navigate these uncertainties carefully, balancing potential risks from over- or under-estimating inflation.

Looking Ahead: Core PCE and Policy Direction

The focus now shifts to the core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge. Based on the CPI components, core PCE inflation is tentatively estimated at 0.2% m/m, though this hinges on upcoming Producer Price Index (PPI) data. While PCE figures will only be published two days after the Federal Open Market Committee (FOMC) meeting, the Fed will likely have preliminary estimates to guide their decision-making.

November’s CPI data reflects steady inflationary pressures but highlights the critical role of seasonal adjustment factors in shaping the narrative. While shelter costs show signs of easing, sticky core services inflation continues to pose a challenge. The Fed faces the delicate task of interpreting mixed data as it considers its next policy steps. As inflation trends remain clouded by pandemic-era distortions, Powell’s emphasis on smoothing figures over time will remain crucial in navigating the path toward price stability.